Commercial Bank Lending Rates In Nigeria

Prior to July 3rd, 1987, interest rates in Nigeria were directly controlled by the monetary authorities. This however, was based on expert advice in the absence of a well-developed financial markets CBN (1998:2). Under this system, the government would set the deposit and lending rates of the financial intermediaries at their prevailing levels, and also the rates for lending to special and specified sector.

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In July 1987, all these were abolished and since the introduction of the deregulation policy in the country, inflation has been on the increase. Measures to control this always proved negative since the constitutional structures as well as theoretical frameworks borrowed from Western countries are no longer applicable in our Nigerian perspective.

The purpose for this study is to investigate the deregulated interest rate and its impact on inflation within the period under study. This is because, inflation has been recognised as a social ill that blows no one good in the society. It is a problem that has often proved difficult to

tackle largely because any meaningful attempt at curing it would entail a trade-off among other important macro-economic and social objectives such as increased employment, economic growth and other social safety nets (CBN, 1998).

It is however, noted that the price of all goods and services may not rise simultaneously or by the same proportion. Note that, an increase in the price level may not depict an inflationary phenomenon but if the situation is sustained, then inflation is implied with serious consequences for macro-economic stability, Okorie (1993:34).

The rate of price increase, that can constitute a problem is as stated by Johnson (CNB, 1978:57) “a political question determined by public opinion”. But this however, varies among countries over time within a country. As is the case of interest rates, it is said to be one of the most major economic device, which has been devised to regulate and control the volume and cost of money as well as dictate direction of credit that must be paid to get people to forego willingly the advantage of liquidity. It is also said to be the price, which must be paid for the right to borrow loanable

For an economy to achieve a rapid and sustainable growth and development depend on its monetary policy which is referred to as the combination of measures designed to regulate the value supply and cost of money in an economy. An excess supply of money for instance, would result in an excess demand for goods and services which would cause inflation and at the same time deteriorate the balance of payment position. On the other hand, an inadequate supply of money would induce stagnation in the economy thereby retarding growth and development.

Economists have at various times shown the correlation between interest rate and inflation, consumption and saving, e.t.c It is generally accepted that, a high lending rate discourages investment, brings a fall in

saving, fall in income and consequently will reduce corruption. Conversely, it is also believed that, high rate of interest on savings will induce saving, fall in lending rate, induced investment, increases income, increase consumption and at the long run brings about inflation in the economy. Thus, interest rate serves as the rationing devices that allocate scarce capital funds in an optimal manner among competing investment project (CBN, 1998). The primary roles of interest rate are to help in the mobilisation of financial resources and to ensure the efficient utilisation of such resources in the promotion of economic growth and development.

The deregulation of interest rates came into effect in August 1987 as a policy instrument of SAP. This was to enhance the development of financial system in the economy and to further accelerate the attainment of the objectives of SAP. Deregulation here can be said to be a deliberate and systematic liberalisation of the structural and operational guidelines under which the economic units has been thriving (Anyanwu, 1987). This essentially indicates that from then on, the interest rates were to be

determined by the market forces (that is, forces of demand and supply of loanable funds).

1.2 STATEMENT OF THE RESEARCH PROBLEM

Nigerian economy recently witnessed a high degree of liberalisation which started with the foreign exchange market under the Structural Adjustment Programme (SAP) of 1987. This was followed by the deregulation of interest rate and then the capital market. The implication is that, the forces of demand and supply (market forces) or the invisible hands of the market” according to Adam Smith, will determine who gets what and at what rate in the foreign exchange market, money market and capital market. The deregulation exercise has witnessed more frequent changes especially in the foreign exchange rates and interest rates than before, and thus has led to the ever increasing rate of inflation in the economy. The high and unstable rates of interest have resulted to tremendous increase in the cost of production which is generally reflected in the high cost of consumers’ goods. As such, government however, put a question mark on its belief in the efficiency of the market forces as regards interest rates

when in 1991 fixed minimum rate to be paid on deposits and maximum lending rate for the banks. But the big question now is, to what extent has the deregulation of interest rate affected the price of commodities in the country? Or its impact on inflation? This research paper therefore, seek to provide answers to this important question.

In the final analysis of this research work however, one will be able to identify why the deregulated interest rates rather than achieve growth and development has instead, brought about inflation and why our policy makers are finding it difficult to solve the crisis.

1.3 OBJECTIVES OF THE STUDY

The major objectives of interest rate as earlier mentioned include the promotion of the development of financial system of the economy, encouragement of inflow of funds held abroad by Nigerians by making it more attractive, efficient utilisation of financial resources for the promotion of economic growth and development and above all, to maintain a stabilisation of price system in our economy. Meanwhile, since the inception of the

deregulation of interest rates, the extent to which it has achieved its objectives and impact on inflation in the economy has not fully been assessed. This research work therefore, is meant to:

a. Determine the impact of commercial banks lending rates on inflation in Nigeria between 1985-2004 a gap of 20 years.

b. Make necessary recommendations based on the findings to the government on how best to attain the objectives of interest rates with minimum negative impact on inflation.

1.4 HYPOTHESIS OF THE STUDY

For simplicity sake, the hypothesis to be tested in this study will be as follows:

H0: That changes in bank lending rate has no significant impact on inflation rate in Nigeria.

H1: That changes in bank lending rate has significant impact on inflation rate in Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

This research work seeks to assess the deregulation of interest rates in the Nigerian economy with particular emphasis on inflationary level, which has been recognised to be a hindrance to growth and development. The results of this research work will serve as a guide to the monetary authorities in Nigeria in appreciating the full impact of the deregulation for making any necessary adjustments and to serve as a guide in future policy formulation. It is also hoped that, the study will bring to their knowledge the operations and impacts which interest rate deregulation policy has had on them in mapping out of survival strategies under the prevailing economic circumstances.

In addition, the result of this study will equally be of use to government and policy makers in formulating policies on economic stabilisation and to know the best strategies to adopt in fighting inflation. Above all these, the study shall be of importance to future researchers in the field of economics since it is simply an academic exercise.

1.6 SCOPE AND LIMITATION OF THE STUDY

Obviously, this study did not treat in details the mechanism of interest rates and the variables affecting it, but it sufficiently brings out the salient points necessary for achieving the objectives of the study. Similarly, the study did not delve into other problems that might contribute to bring about inflation in the country since 1985-2004, which hampered growth and development, such as hoarding by individuals and other government policies. But effort is concentrated on the impact of the deregulation of interest rates on inflation from 1985-2004 a space of 20 years.

Nevertheless, this research work has the following constraints: Time constraint – the time frame given to this study is too short for proper and meaningful research work. Also, the problem of data collection from the financial institutions especially that of the apex bank and other commercial banks was another constraint for this study.

Finally, inadequate finance is one of the biggest constraints that made the researcher not to have done more in this research work. Above the mentioned limitations, any other omissions and commissions that might have been discovered in this research work is exclusively that of the researcher.

2.0 LITERATURE REVIEW

2.1 THE THEORETICAL FRAMEWORK AND LITERATURE REVIEW

Among the theories that seek to explain the determination of interest rate are as follows:

i. The Classical or real theory.

ii. The loanable funds or neo-classical theory.

iii. The Keynesian or liquidity preferences theory.

iv. The neo-Keynesian or fiscal theory and

v. Hick Hansen synthesis or modern theory of interest.

The classical theorists are of the view that interest rate is determined by demand for saving to invest and supply of savings. That the rate of interest is determined by the equilibrium of saving and investment. The theory seeks to explain the determination of the rate of interest by real factors like productivity and thrift that is, productivity of capital goods and savings of goods. They are of the view that the rate of interest is thus determined y the demand for savings to invest in capital goods and supply of savings (Adekanye, 1984). How this is determined by the

introduction of demand for investment and supply of savings is illustrated in figure 2.1 below:

Fig. 2.1 Loanable funds framework

From the diagram above (i.e figure 2.1, SS is the supply of savings while II is the demand curve of savings to invest in capital goods. The demand for investment and supply of savings are in equilibrium at the rate of interest where the curves intersect with each other. Hence it is the equilibrium rate of interest, which will come to stay in the market. In this equilibrium position OM amount of money is lent, borrowed and also invested. If any change in the demand for investment and supply of savings comes about, the curves will shift accordingly and therefore the equilibrium rate of interest will also change. The classicalists thus argued that the sole function of money is to determine the general level of pries at which goods and services will be changed.

The loanable funds theorists according to Adekanye (1984;85), believed in the time preference explanation of how interest arises. The Neo-classical theory states “interest is the price paid for the use of loanable fund”. Like the classical and Keynesians theories, it asserts that, the rate of interest is determined by the equilibrium between demand and supply of loanable funds, that the supply of loanable funds comes from savings while the demand for loanable funds comes from investment. Both of these comes from the real sector of the economy, so the interest rate is considered as real variable not a monetary variable. That the prevailing rates of interest at any one time represent an equilibrium price at which the demand for credit from those who prefer to have the goods now, will equal the supply of loanable funds from those who are to have interest, as can be seen in figure 2.2.

Fig. 2.2 The Demand and Supply of Loanable Fund.

This shows how this theory would work at a given level of supply and demand for loanable funds where there the equilibrium price of borrowed money is 4 percent. The curve DD represent the demand curve while the supply curve is represented by SS curve. Assuming that interest rates are at 2 percent, then there would be excess demand which will force the rates to rise, encouraging more people to save until the interest rate reaches 4 percent where demand and supply reached equilibrium. On the other hand, if the rates were at 6 percent, there would be excess supply and lenders would have to reduce their rates. The reduction in rates will encourage an increase in borrowing. At the same time, a reduction in rates would lead to a reduction in saving as some people would probably decide to liquidate their savings. This action will result in the reduction of the supply of loanable funds.

Also the Keynesian or liquidity preference theory according to Paflredman et al (1984) is of the view that, it is the liquidity preference and supply of money that determines the rate of interest. That liquidity preference speculatives along with the quantity of money determines the rate of interest while supply of money is determined by the policies of the government and the Central Bank of The country. They further argued that the marginal revenue productivity of capital tends to become equal to the rate of interest but the rate of interest is not determined by marginal productivity or capital. Also that, interest is not a reward for saving or thriftiness but, for parting with liquidity. They asserted that it is not the rate of interest that equalises saving and investment but this equality is brought about through the changes in the level of income as can be seen in figure 2.3.

Fig. 2.3 Liquidity Preference Curve and the Money Supply

In figure 2.3, we have seen that the money supply is plotted against the liquidity preference curve to demonstrate that the greater the money supply the lower the interest rates are likely to be. This can be translated in general terms to mean the richer people are, the greater their savings will be and the smaller the inducement required for them to give up liquidity on a proportion of their savings. This applies to societies as a whole as much as to people individually. It can be seen that the liquidity preference curve is intersected by SM1 and SM2. When the money supply is at a lower level (SM1), interest rates are at 10 percent. If supply of money increases to SM2 this has the effect of decreasing interest rates to 7 percent.

The basic proposition of the Neo-keynesian school of thought is that money does not matter in the short-run. They argued further that, money supply transmission mechanism is an indirect process, working through the cost of capital channel via rate of interest hence, the monetarists casual connection between money supply and income does not appear to be correct rather the reverse causation in which a change in the income level affects changes in money supply appears to be compatible. Accordidng to Anyanwu (1987), this theory is based on the short period considering when money flow rather than stock becomes a crucial variable. To them, budgetary policy has significant effect on income, employment and output in the short-run; even if there is no new supply of money, that debt is as crucial as the stock of money. An increase in the growth of interest-bearing debt would result in an increase in the equilibrium growth of nominal income without a corresponding increase in the rate of money. They maintained that the interest elasticity of demand for money is infinite. The effect of changes in the money stock

depends only on the slopes of liquidity preferences or marginal efficiency of investment curves. If money demand is a function of interest rate as in Keynesian speculative motives, monetary policy becomes at once ineffective. For the situation of perfectly elastic or inelastic, money does not matter. Thus, the effects of the money policy have to be predictable, if the policy is to be of any utility. But the instability of velocity function clearly precludes that possibility hence it is said that, the long-run quantity theory of money is deficient.

The Hicks-Hansen approach was developed in a bid to reconcile the classical and Keynesian views of the interest rate determination. According to Okigbo (1981), it is shown clearly that the government is in a position to influence the level of economic activities or the level of national income by using monetary and fiscal measures. Hicks has integrated the theory of money with the theory of income determination. Hicks has utilised the Keynesian tools in a method of presentation which shows that productivity, thrift, liquidity preference and money supply are all necessary elements in a comprehensive and determinate interest theory. According to Hanson (1979), “an equilibrium condition is reached when the desired volume of cash balances equals the quantity of money, when the marginal efficiency of capital is equal to the rate of interest and finally, when the volume of investment is equal to the normal or desired volume of saving. And these factors are inter-related. Thus in the modern theory of interest, saving, investment, liquidity preference and the quantity of money are integrated at various levels of income for a synthesis of the loanable funds theory with the liquidity preference theory. According to this school of thought, if the real rate of interest becomes negative, it may even become attractive to claim real resources and not to use them. He also opined that inflation clearly reduces the purchasing power of money. If inflation becomes excessive not only may voluntary savings be discouraged, but the use of money as a medium of exchange may be discouraged since inflation reduces the purchasing power of money, holders may be expected to avoid the loss by cutting down their holdings of money for transaction purposes. That inflation also causes energy, time and resources to be devoted to minimising the use of cash balances. There are also the distributional consequences of inflation to consider, which are difficult to Asses. All that can be said is that debtors benefit at the expense of creditors, profit earners gain at the expense of wage earners, real asset holders probably gain relative to money asset holders, the strong probably gain relative to the weak (in bargaining sense) e.t.c.

2.2 EMPIRICAL LITERATURE

Having considered some of the potential dangers of inflation, it can be seen that there is plenty of room for disagreement over whether inflation encourages or discourages development. Scholars like Anyanwu (1987) argued that inflation can raise the level of real saving and encourage investment while people like Samuelson (1976) maintained that inflation is liable to stimulate the wrong type of investment and that if it gets out of control may retard development through the adverse effects of productive investment and the balance of payments.

In Nigeria context, what is needed mostly are substantial policies that would enable the economy to have a stable price. For a person like Samuelson, the third macro-economic objective is to maintain stable price. The desire to maintain this is a subtle concern embodying the judgement that a smoothly functioning market economy is the most economic activities.

Well, in trying to synthesise the ancient theories of money with the inflationary theory, one would notice that the classical or neo-classical economists who commented on the issue of non-governmental interference gave little or no concession to inflation as it is obtainable in the Nigeria context, while most of the classicalist shared J.B. Says law of markets, others like Malthus disagreed with Says position and were of the opinion that increased savings would not only increase investment but also will increase output.

The challenge before policy-makers in Nigeria today is that of controlling inflation effectively and at the same time ensuring efficiency in aggregate demand which may crush out inflation. The Keynesian and Neo-Keynesians shared a common view that a prior increase in the stock of money obviously causes an increase in the rate of inflation. To this school of thought, inflation can be controlled by checking the growth of the money supply. In the light of this recommendation, Powell’s (1989) submits that ‘it is impossible to control the money supply directly”. It is worthy to admit here that, Powell’s aforementioned submission may not be the case in Nigeria, in times of economic deregulation. As was the case of the quantity theory of money in inflation control of the 18th century which was out-fashioned in the 1930s Keynesian revolutionary ideologies. Hence, even the 1930 Keynesian philosophies are already becoming irrelevant to Nigerian situation.

As a result of the out-datedness of some of the Keynesian revolutionary postulations, Milton Friedman’s research strongly reinforced monetary policy and was seen as a counter revolution in the policies of economic stabilisation in the United Kingdom. Apart from that, it is also safe to say that since monetary policy during the Keynesian era reflected in economic changes of UK in the 1970s. most of the policy measures experimented should reflect on the realities of economic changes of Nigeria in an era of economic deregulation. It is in this analysis that monetary and fiscal policies in Nigeria today differ from what is obtained in the UK at the time of classical and Keynesian theories. Apart from that, proponents of Keynesian theories did not locate the cause of inflation in the growth of the money supply and therefore control of this variables was not an integral part of Keynesian monetary policy prescription.

It is in view of this argument that the Keynesian postulation in the 1930s does not have valid applicability to the deregulatory economic era of Nigeria. In discussing issues of economic crisis Powell’s observed that “each of our countries have specific problems that are peculiar to character of its own economy”. In some countries however, the fundamental challenge to current stabilisation policies in the persistence of inflationary pressures. Also, in the tendency to over-rely on monetary restriction as a strategy to check inflation.

Inflation has been described as a social malady as well as a perceived economic phenomenon whose effect are felt in varying degrees by every citizen and in all sections of the economy. It is a problem that has often proved difficult to tackle largely because any meaningful attempt at curing it would entail a trade-of among other important macro-economic and social objectives such as, increased employment, economic growth and social safety nets (CBN 1998)

It is however, noted that the price of all goods and services many not rise simultaneously or by the same proportion. It is worthy to mention here that, an increase in the price level may not depict an inflationary phenomenon but if the situation is sustained, inflation is implied with serious consequences for macro-economic stability. The rate of price increase, that constitute a problem is as stated by Johnson (CBN 1978: 167), “a political question determined bypublic opinion”. But this however, varies among countries and over time within a country. In developed countries for instance, there is a general feeling that a continuous annual rate of price increase above 2 percent is evidence of an inflationary policy response.

As in the case of interest rates, it is said to be one of the major economic device, which has been designed to regulate and control the volume and cost of money as well as dictate direction of credit in the economy. Interest rate is the price that must be paid to get people to forego willingly the advantage of liquidity. It is also said to be the price which must be paid for the right to borrow loanable funds interest rates are classified as normal (market) and real interest rate respectively. The normal interest rates are the interest rates actually paid while real interest rates are nominal minus expected rate of inflation. Hence, the nominal rate of interest refers to the real interest rates plus the rate of interest in the price level (Samuelson 1976).

For an economy to achieve a rapid and sustainable growth and development depend on its monetary policy which is referred to as the combination of measures designed to regulate the value of supply and cost of money in an economy. An excess supply of money for instance, would result in an excess demand for goods and services which would cause inflation and at the same time deteriorate the balance of payment position. At the same time an inadequate supply of money would induce stagnation in the economy thereby retarding growth and development.

It is only heavy reliance on a balanced programme of fiscal and monetary restraints that we can achieve the desired policy objectives. As for why the earlier mentioned policy devices are partially workable in Nigeria is that, there are some distortions in the Nigerian economy, such as excessive demand absolute decline in real output, unemployment, economic sluggishness e.t.c . Inflation can only hope to be cured when adequate stabilisation efforts are tailored toward the removal of these distortions. It is apparently that uncontrolled increase in interest rate has fuelled inflation which decreases the real value of individual income and corporate wealth in Nigeria.

2.3 REVIEW OF THE CBN REGULATION OF INTEREST RATES SINCE ITS INCEPTION.

The regulatory power of the Central Bank of Nigeria over the banking system in Nigeria derives essentially from the Central Bank Act of 1958 and its subsequent amendments. For the Central Bank to perform its function of regulating the banking activities, it makes use of such instruments such as, the Open Market Operation (OMO), Discount Lending Rates and Direct Controls on bank lending which it has been empowered to do since its inception. Other control measures are moral suasion, reserves requirement e.t.c. The CBN Act of 1958 (Cap 30) as amended in 1962-1969 empowered the CBN to set the rediscount rate for all licensed banks and this determines the interest rates set by the banks. The banks are expected to link their interest rates on advances, loans, or credit facilities to the CBN’s minimum rediscount rate. The rates fixed by banks were subject to minimum and maximum rates of interest which when approved shall be the same for all banks. The minimum rediscount rate set by the Central Bank and the consequent interest rates approved by it for the banks depends on the economic policy being pursued by the government. The control of the interest rate structure of banks by the CBN was promulgated in the 1962 budget speech and was fully provided for in section 14 of Banking Decree. The reasons for the regulation of interest rate in Nigeria were due to the underdeveloped nature of the financial market coupled with the relative scarcity of capital resources in the economy. The regulation was also aimed at promoting orderly growth in the financial market, combating inflation and lessening the burden of internal debt servicing on the government. The CBN issues the monetary policy circulars usually on annual basis defining credit guidelines for the banking sector. These guidelines, mainly relate to sectorial distribution of loans and advances, credit minimum and maximum price, lending and borrowing conditions and the structure of bank assets. All banks are required to apply the reducing balance method in calculating their interest Charges on loans payable on agreed installment thereby charging more than the controlled rates. A range of various classes of loans was usually established and commercial banks were expected to lend within those limits. Regulations of banks also include the supervision of their activities through the examination of their records and books of accounts.

2.5 THE STRUCTURE OF INTEREST/INFLATION RATES SINCE 1985-2004.

Interest rate operate primarily as the cost or price of money or credit. As a price for obtaining loanable funds and a return for foregoing liquidity, interest rates have an important allocative influence on the economy by affecting the vital operating cost of a business changes in interest rates can exert a significant impact on the level of inflation. Again as a return to savers, interest rates can also exert significant impact on future consumption like any other price, interest rates play a large part in equating the supply of and the demand for loanable funds. It is because of these important influences that monetary authorities attached much importance to the structure level and changes in interest rates. It also explains why interest rates control is usually invented in the apex bank of any country charged with the responsibilities of maintaining stability in the purchasing power of the currency both within and outside the country.

The year 1985 witnessed how interest rates were adjusted upwards across the board by 11/ 2 percent to 2 percent points except lending rates for agriculture and maximum lending rate allowed. The increase in the rate on the government debt instruments were meant to stimulate increased investments in them. The upward revision in commercial banks deposits to the institutions while the adjustments in the lending rates were designed to ensure more efficient allocations of investable funds. It is also witnessed that inflation rates during this period was dropped from 39.6 percent in the previous year to 5.5 percent in 1985 (CBN, 1985).

In 1986, there was an introduction of the structural Adjustment programme (SAP). During the first nine months of 1986, the structure and levels of interest rates remained virtually unaltered from the 1985 levels. However, based on the decision of the government to embark on progressive deregulation of the economy, a non dynamic interest rate policy was introduced in the last quarter of the year. That allowed banks to negotiate with their customers interest rate on time deposit account above the minimum fixed at 81/2 or 8.5percent per annum. In addition all lending rates were adjusted upwards. The inflation was 5.4 percent.

Meanwhile, in August 1987, the deregulation of interest rates becomes effective and banks were to fix their interest with regard to the CBNs minimum rediscount rate, which was reduced from initial 15 percent to 12.75percent. The reduction in the minimum rediscount of the lending rate meant a reduction of the lending rate of commercial banks by anything between 2 and 3 percent points, while inflation rate shot from 5.4 percent to 10.2 percent during this period of time. The prime lending rates in 1988 ranged between 16.50 percent to 18 percent to while the deposit rates ranged between 11 to 13 percent. However, the inflation rate increased to 56percent in the last quarter of 1988, the minimum rediscount rate was raised from 12.75 percent to about 18.50 percent. By the tail end of 1989, the prime lending rate had reached 25.5 percent for commercial banks and 29.8 percent for merchant banks while deposit rates ranged between 16.5 percent and 20.8 percent depending on the time structure and inflation rate during this time was increased to 40.9 percent. These was due to the result of the upward revision of the minimum rediscount rate.

The rise in interest rates continued throughout by the end of which the prime lending rate for commercial banks was 26 percent and 28.5 percent for merchant banks respectively. The inflation rate as at this time was recorded to drop to 75percent due to the decrease in the interest rate.

In January 1991 the CBN set an upper limit of 21 percent on banks lending rates and a lower limit of 13.5 percent on deposit rates. Bank interest rates moved generally downward as a result of this, commercial and merchant banks rates moved within the stipulated range.

And the average rate on commercial banks saving deposits fall to 4percent point, 17.8 percent in December 1990 to 13.6percent in January and arranged between 13.5percent and 14.0 percent through out the year. The banks rate on other types of deposit also fall to about 4percent points. The prime lending rate fall from 26 percent to 19.9percent at the end of the third quarter but edged up to 20.2 percent at the end of the year, while the inflation rate was estimated that year to be 13 percent.

In 1992, interest rate remained almost at the same level as in the preceeding year until the ceiling on lending rate of 21percent was lifted. This caused rapid increases in the level of interest rate and this spilled over into 1993. In 1993, the average lending rate charged by Banks was 40 percent while deposits attracted an average of 43 percent. The rate of inflation recorded those years were 44.5 percent and 54.2 percent in 1992 and 1993 respectively. In 1994, some measures of regulation were introduced in the management of the interest rates. Deposit rates were set at 12-15 percent per annum, while ceiling of 21 percent per annum was fixed for lending.

The development of interest rates within this period were generally within the prescribed limits with deposit rate ranging from 12 percent in the first quarter to 13.8percent in fourth quarter, while lending rates under the prescribed maximum of 21 percent. The rates were negative in real terms since inflation was estimated to be 57 percent that year. In 1995, the central bank maintained the interest rates regime introduced in 1994 with minor modifications to make for flexibility. Banks and other financial institutions were required to maintain the maximum spread of 7 percent point between the deposit and lending rates subject to a maximum lending rate of 21 percent. It also allowed room for negotiation up to a limit of 21 percent per annum. The inflation rate were estimated at 63.5, 74.3,78.5,and 72.8 percent in the first, second, third and fourth quarters respectively.

In 1996 and 1997, the previous interest rate policy measures were retained with indication that effort would be made to create an enabling environment for the full deregulation of interest rate later. Also, different inflation rates were estimated during the years for instance, we have 63, 48.7, 37.4 and 29.3 percent were estimated in the four quarters of 1996 while about 34 percent inflationary rate were estimated in 1997.

In 1998, the prime lending rate was put at 18percent with a maximum lending rate at 21percent while inflation increased to about 10percent. Bank lending rate saw a tremendous increase at the tail end of 1999 with a prime lending rate of 21percent and a maximum lending rate at 27percent whereas, inflation falls to 6.6percent at the end of the fourth quarter of 1999.

In 2000 and 2001 respectively, commercial bank lending rate was at 22percent and 21percent with a difference of 1percent from the previous year. Inflation in this two years stand at the tune of 7 and 19 percent respectively, while in 2002, the prime lending rate of commercial bank was estimated to about 20 percent with maximum lending rate at 22 percent and the inflationary position of the economy was 13 percent. The increase in both deposit money, banks lending rates, the prime lending rate and inflation saw a tremendous increase in year 2003 as the prime lending rate was estimated at 21.16, 21.15, 20.04 and 19.58 percent for both the first, second, third and fourth quarters respectively.

In the final analysis on the structure of interest rate and inflation since 1985, we shall here examine the profile of inflation and interest rate at the end of the last quarter of 2004. For the first quarter of 2004, the prime lending rate of commercial banks was estimated at 19.47percent and the maximum lending rate of 21.13percent while inflation rate stood at a bout 17.8 percent. The second quarter of same year saw an increase in the prime lending rate of 0.32percent while that of the maximum lending rate had an increase of 1.53percent and that of inflation rate increased at the rate of 1.6percent from the first quarter. The third quarter of 2004, have 19 and 20.24percents as an estimated prime lending rate and maximum lending rate, while that of inflation stood at the rate of 18.2percent. Finally, the last quarter of the year has 18.91 and 20.42percent as both prime lending rate and maximum lending rate with inflation rate at the tune of 15 percent.

5.0 SUMMARY OF THE FINDINGS. CONCLUSIONS AND RECOMMENDATIONS.

5.1 SUMMARY OF THE FINDINGS

The findings of this work was drawn from a combination of the different phases of work, literature review as well as analysis of both interest and inflation rates in the period under review. In the literature review, theories of monetary and fiscal policy instrument have been examined. Also enough literature has been reviewed pointing out clearly where applicable to the Nigerian economy the interest of this work and where such views are non-applicable and synthesis drawn where necessary.

A quantitative assessment of the deregulated interest rate and inflation rate during the period was undertaken using a simple regression techniques. Both the descriptive and the quantitative analysis seem to indicate that changes in Bank lending rate have caused inflation in Nigeria within the period under review. The result indicates that, changes in bank lending rate has significant impact on inflation in Nigeria.

Based on the data collected and analyzed, the following findings were made on policy implication of interest rates.

That there is a relationship between interest rate and inflation. That is, inflation has steadily been on the increase despite frequent changes in interest rate.

That monetary authorities have not been able to effectively implement the administratively fixed interest rate regime from 1985-1987.

That high interest rate and infact, the failure of any country to pursue an optimum interest rate policy can distort macro economic parameters and cause serious damage to the country’s economic development.

That the basic problem in Nigeria today is not the making of policies but the implementation. Considering other policies in existence, most of the times, a good policy might equally be crushed out due to political reasons or short term initial set backs.

The research also reveals that with the deregulation of interest rate in the period under study, the financial system has been inefficient in the sense that funds mobilization has failed. The financial institutions have not been able to meet their statutory obligations and laws governing their operations. This is evident in the collapse of some commercial and merchant banks which lead to their liquidation.

Finally, it has been observed that, there are other factors that can affect inflation in Nigeria, other than the interest rate; such factors include Government deficit financing and money hoarding etc.

5.2 CONCLUSIONS.

Attempts has been made by the researcher to show that inflation occurring in the Nigerian economy cannot be classified along with the one suggested by Keynesian and the monetarist schools of thought. The theoretical and empirical analysis of the macro-economic structure of the Nigerian economy points to the important role being played by the deregulated interest r ate. As we can see that inflation has become one of the most crucial constraints in economic management in this country despite the bold efforts been made by monetary authorities to bring down the level, and their perception that the best and perhaps the only way of doing that is by a drastic reduction in the level of bank credit does not seems balanced.

5.3 RECOMMENDATIONS.

It is important to emphasize at this juncture that, the Nigerian economy like any other one is dynamic and as such we c an not expect the price level to be stable.

However, a galloping inflation is not of any benefit or healthy to a developing economy like ours. Considering this fact, the resources of this abundantly blessed nation should be managed in order to achieve economic growth and development, irrespective of the amount of sacrifices involved. Accordingly, the following recommendations are hereby made:

An administrative fixed interest rates should be revitalized, that is a strictly regulated interest rates philosophy to be reintroduced. This should include a clear cut definitions of monetary authorities of how interest rate should be managed.

Apart from that, the monetary authorities (CBN) should also adopt more drastic punitive measures to stem the disparity in the rates which are charged on loans and advances by different banks within the same economic circumstances or vicinity.

Also, the guidelines of the financial system should not be left to the interplay of the market forces alone to determine who get what at what rate.

In the implementation of the government monetary policies, the monetary authorities have to make a choice to see that an optimal minimum of different policies, in the prevailing condition should be in the best interest of the nation.

Nevertheless, if the deregulation must be retained or if it is compulsory that deregulation should not be abolish, then it should be operating within the framework of some measures of checks and balances by the monetary authorities. This means deregulation should not be left to the interplay of the market forces alone, financial institutions must be brought back into the loop of monetary ease and restraint.